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Liability in Markets for Credence Goods

Yongmin Chen (), Jianpei Li and Jin Zhang

MPRA Paper from University Library of Munich, Germany

Abstract: We study the role of liability in disciplining an expert's behavior in a credence good market. The expert, who can provide two potential treatments for a consumer's problem, may misbehave in two ways: prescribing the "wrong" treatment given his private information, or failing to exert proper effort to diagnose the problem. We show that under a range of liability rules, the expert will choose the efficient treatment based on his information if the price margins for the two treatments are close enough. Moreover, a well-designed liability rule can motivate the expert to choose efficiently both the treatment and the diagnosis effort. This efficiency result continues to hold when the expert's diagnosis effort generates only a noisy signal about the nature of the consumer's problem, provided the signal is sufficiently informative.

Keywords: Credence goods; private information; diagnosis effort; undertreatment; overtreatment; liability (search for similar items in EconPapers)
JEL-codes: D82 I18 K13 L23 (search for similar items in EconPapers)
Date: 2017-07-15
New Economics Papers: this item is included in nep-law, nep-mic and nep-mkt
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